Thursday, 11 May 2017

Warren Buffett and the 3G Takeover Attempt of Unilever: The Importance of Looking at the “Bigger Picture”

In today’s post, the focus will be on something more
existential than is usually the case here in Financial Regulation Matters. In what is, perhaps, an indulgence,
today’s post will look at the recent comments made by legendary investor Warren
Buffett regarding the failed takeover attempt of Unilever by Kraft-Heinz and
its partner 3G. Buffet spoke in relation to the criticism that is being
directed towards the practices of 3G – particularly regarding its ‘predatory’
behaviour and its penchant for cutting costs by any means necessary, as was previously
discussed in Financial Regulation
Matters – to which he responded that 3G was only following a ‘standard
capitalist’ approach. In light of this, we will take a closer look at the
story, but then expand the discussion to a call for the need to consider systemic issues, like Buffett does, rather
than have our vision clouded by micro-issues.

There is little need to review the whole process of
Kraft-Heinz’s failed takeover attempt of Unilever earlier this year, as it has
been covered extensively. Simply, Kraft-Heinz, which is owned (by way of a
majority) by Buffett’s Berkshire Hathaway and Brazilian Billionaire Jorge
Lemann’s 3G, tabled
a £115 billion approach to take-over the Anglo-Dutch company Unilever. The
deal garnered attention, primarily, because it represented what one onlooker
accurately described as a ‘collision
of two very different models of capitalism’, and it is that systemic
duality that is of interest here. Unilever is renowned for its commitment to
sustainable prosperity by way of contributing to and developing
social and environmental goals, with its CEO Paul Polman, who had trained
to be a Priest, affirming his belief that ‘a
purpose-driven business can be profitable… I don’t know where this notion that
it can’t be comes from’ – a fitting sentiment for a company that has its
origins in a Victorian-era mission to promote hygiene
across England. This is not to suggest that the company is angelic in any
way, because it has received
criticism in the past, but ideologically
the company differs greatly from those who wanted to take over the company. 3G,
as a firm, are renowned for their approach, which usually entails intensive
cost cutting, job losses, and eventually asset stripping, whereas Buffett is
globally famous for his shrewd and calculated approach to investing, which will
often see companies transformed and rearranged beyond recognition so that the
maximum amount of profit can be made – this author is reminded of Buffett’s
masterful approach to the acquisition of the century-old credit reporting firm
Dun and Bradstreet (D&B), in which it was Buffett’s intention to acquire Moody’s
credit rating agency at a discounted price. Through a process known as ‘stock
arbitrage, Buffett would ‘spin off’ Moody’s from D&B and would leave with
Moody’s in his pocket for the incredible
price of just $139 million – he has made this money back and then some,
given Moody’s’ rapid growth over the last two decades. Yet, Buffett, one of the
world’s richest people, suggests that he has a ‘defect’
in that he wants to be more focused
on ‘efficiency’ like 3G are with their businesses. In defending 3G’s practices,
Buffett suggested that the cost-cutting job-cutting approach is ‘pro-social in
terms of improving productivity’ and that 3G ‘have
been very good about severance pay and all of that, but they have followed the
standard capitalist formula, market system formula, of trying to do business
with fewer people’. For this author, this sentiment is the root of the
majority of problems in today’s world.

Reading about Paul Polman, it is hard to ignore the polarity
between these two approaches to doing business. Speaking in 2015 about the fact that Unilever
had missed market projections for their performance in six of the previous
eight quarters, Polman argued that the problem was not with Unilever, but with
market forecasters: ‘Analysts have over-optimistic expectations’ and ‘we would
be a hostage to the financial market if we ran this company judged on
expectations’. Polman’s criticism allude to a much bigger problem, and that
is something that this author is currently examining in a forthcoming book – the role of economic
empiricism. This devotion to the marketplace, via the ideological support of favoured economists, is nothing short of
a blight on our society. Economics, as a discipline, is a noble discipline that
seeks to examine the formulaic impact of the marketplace, which of course is
absolutely necessary. However, this insistence upon conducting business in the
most efficient and effective way possible is not ‘capitalism’,
it is ‘predatory’, and there is a massive difference between the two. Buffett’s
regret at not being more like his partners at 3G is demonstrable of an
underlying greed that is consistently and ideologically supported by certain
Economists who proclaim that this yearning for ‘efficiency’ and ‘effectiveness’
– those implicitly-destructive buzz words – should extend beyond the
marketplace onto all areas of society. This sentiment needs to be resisted at
every turn, and Unilever should be (and were) applauded for rejected the
advances of such an ideology.

Ultimately, this stance may be framed within certain
political parameters, but that would be missing the point. This author does not
reject capitalism, but argues, as Polman does, ‘who says’ that this promoted
version of capitalism – what is referred to here as ‘predatory capitalism – is how
we should conduct business? It is true that the Right-leaning parties advance
this version of capitalism, but it is important to remember that it is underpinned
by a movement within certain sectors of academia that need to be challenged. It
is simply not the case that taking over a company, reducing its costs, removing
its workforce, and ultimately stripping its assets, is an appropriate form of
capitalism – it is not. Unilever demonstrate, quite clearly, that if we turn
our attentions away from the white-noise that is economic empiricism, or ‘economic
imperialism’ as it was once known, and focus upon the fact that there is
more than enough money to go around whilst not actively operating against everyone
who is not one of your shareholders, then many of the devastating societal
issues that are nothing short of a blight upon society would arguably be
removed. Remove the glamour of Buffett’s riches, and you are left with a man
who represents something that is truly
antisocial.

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